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NEW YORK (CNN/Money) -
Once again, investors are caught in the dilemma that has been holding back stocks for the past 18 months. The growth numbers are better than expected, but the risks seem awfully high as well.
The logical response is to defend against the risks, while trying to remain open to further gains. That's best accomplished by looking for stable stocks that have consistently been meeting and surpassing expectations. One classic example is Procter & Gamble, which reported excellent results Monday morning.
It's hard not to be bullish on the overall market, if you look at earnings data by itself. So far, three-quarters of the companies in the S&P 500 have reported second-quarter profits, with year-over-year gains averaging 15 percent.
Zacks Investment Research estimates that once all the companies have reported, second-quarter earnings growth will average 12 percent, the 12th consecutive quarter of double-digit profit growth.
The general economic outlook is equally positive. On Friday, the Bureau of Economic Analysis estimated that real gross domestic product (adjusted for inflation) grew at a 3.4 percent annual rate during the second quarter. That's down from the 3.8 percent of the first quarter, but it's still an above-average growth rate.
This rosy picture is marred, of course, by risks of unexpected external shocks -- principally from terrorism or soaring energy prices -- that seem increasingly likely. Following the announcement of the death of Saudi Arabia's King Fahd on Monday, the price of crude oil climbed to a record $62.30 a barrel.
So if you're an investor who is bullish but cautious, what should your strategy be?
First, make sure that your portfolio is well-diversified. Assuming you've been doing that, further additions to your holdings should focus on stocks that are both steady and successful.
For the fourth fiscal quarter ended June 30, consumer products giant Procter & Gamble reported a 12 percent gain in diluted earnings per share on a 10 percent gain in revenues. Earnings for the full fiscal year were up 15 percent from year-earlier levels. That's the fourth year in a row that P&G has surpassed its targets.
The company's results were bolstered by gains in unit volume and small price increases. And although commodity costs rose, reducing gross profit margins slightly, some of that squeeze was offset by trimming overhead.
Analysts generally liked P&G's results, although they caution that the coming year may not be quite as flush as the year just ended. On important reason: Favorable currency exchange rates added an estimated two percentage points to earning growth which may not be repeated over the next 12 months.
On the other hand, P&G has been conservative in its guidance over the past few years, and its current 10 percent earnings gain target for 2005-2006 could easily prove to be too low. In recent quarters, the company has regularly gone on to outperform its guidance.
Even if currency exchange rates don't provide the lift that they have over the past year, Procter & Gamble has another source of potential gains. The company is in the process of acquiring Gillette, and hopes to complete the $57 billion deal before the end of the year.
To resolve antitrust concerns, P&G (Research) will have to sell a few minor business lines, but otherwise the deal appears to be on track. If all goes more or less as planned, the merger should add an extra percentage point of sales growth and result in annual cost savings of $1 billion within three years.
Sivy on Stocks resources:
Sivy 70: America's best stocks
Guide to Growth
Michael Sivy is an editor-at-large for MONEY magazine. Click here to receive Sivy on Stocks via e-mail every Tuesday.